Cannabis Regulations: Investors Not Fazed by DEA Decision

“We don’t really see the DEA decision as news,” says Ben Larson, cofounder of cannabis incubator Gateway. Larson is referring to the recent announcement from the US Drug Enforcement Agency that it would not be loosening current federal cannabis regulations.

“The DEA is not motivated to reschedule or de-schedule marijuana; in fact, they are incentivized not to,” he added. “Marijuana enforcement accounts for a significant portion of funding for the DEA. Much like the concerns around the private prison system, people would essentially be out of work.”

Cannabis regulations currently label the drug as a Schedule I substance alongside heroin and LSD, meaning that the federal government believes it carries a high potential for abuse and has no medical use in the US, even under medical supervision.

What does the cannabis regulations mean for startups?

Two petitions to the DEA called for the rescheduling of the drug to Schedule II, a classification for substances with a high potential for abuse, but that have currently accepted medical uses in the US, or acceptable medical uses with severe restrictions. Substances in this category also have a high potential for creating psychological or physical dependence; cocaine is a Schedule II substance.

The DEA’s decision to deny these petitions appears to fly in the face of the growing number of cannabis startups and investors who frequently argue that prohibition of the herb is near an end. While currently focused on specific states where the drug is legal for medical and even recreational use, most cannabis startups and investors will, of course, have hopes of eventually tapping into an illegal recreational market that’s estimated to be worth over $40 billion in the US alone today, and possibly over $100 billion globally.

There are also many consumers, companies, and advocacy groups that disagree with marijuana’s classification as a Schedule I substance, so there was a wave of disappointed expressed across media channels when the DEA announcement hit the wires two weeks ago.

But there was some cause for positivity too.

Good news or bad news?

In his response to the petitions, Chuck Rosenberg, the DEA’s acting administrator, indicated that the agency “will—as [it] has for many years—support and promote legitimate research regarding cannabis and its constituent parts.” And that it would expand the number of DEA-registered cannabis manufacturers supplying to research.

He also pointed out that between 2014 and 2016, the number of DEA registrations allowing research on cannabis, cannabis extracts, derivatives, and THC has more than doubled from 161 to 354.

“Honestly, I think this is an important first step,” said Alex Thiersch, managing partner at cannabis-focused investment fund Salveo Capital. “While the decision doesn’t go as far as many would like, it signals that the DEA is open to the idea of rescheduling when there is more research. The fact that the DEA has opened additional avenues of research is a very positive development. I’m very encouraged by the direction we are heading.”

Scott Greiper, founding member at cannabis-focused investment bank Viridian Capital Advisors, agreed: “Over time, there will be studies that prove its efficacy and which will give the DEA the comfort, empirical data, and other bases it needs to reschedule and at some point de-schedule cannabis.”

Even if the DEA had decided to reschedule cannabis as a Schedule II substance, the results would probably not fall in line with what most would expect. The best Larson thinks the industry could hope for would be a boon of benefits for big pharma while small-scale cannabis businesses remain in the limelight.

“It’s hard to assume much would change on the small business side in the short term, but it could open the door for large corporations to reap the rewards on the backs of cannabis advocates,” he said.

All’s well at the state level

Federal battles aside, the sector remains very much alive and well at the state level. According to Governing, 25 states and the District of Columbia have legalized cannabis to some degree. Four of those states’ cannabis regulations allow recreational use. Others, such as California, are considering authorizing the adult use of marijuana for non-medical means.

In August 2013, the US Department of Justice issued the Cole Memorandum in response to the rising number of states passing medicinal or recreational use laws. With some caveats, the memo seemed to suggest that the federal government wouldn’t interfere with activities carried out in compliance with state-based cannabis regulations. The DOJ expressed its commitment to enforcement priorities regarding the distribution of cannabis to minors, drug-related gang activity, and the use of firearms or violence in the cultivation and distribution of cannabis—all things that most state laws take into consideration.

In light of the number of states that have decriminalized cannabis and considering the number of states considering similar cannabis regulations this November — when states typically vote on ballot measures — Greiper describes the industry as rolling along and growing quite well despite the federal prohibition.

“If you look at the experience of states that have legalized, particularly Colorado and Washington State, that have legalized both medicinal and recreational cannabis, it has been an overwhelmingly positive experience for states and citizens,” he said.

Not only does it generate new tax revenues, but it also creates jobs and boosts real estate values as cannabis businesses look for places to set up shop. For states considering adopting more relaxed cannabis regulations, the DEA’s decision should not impact the health of the cannabis industry at the state level, said Greiper.

“No matter the decision by the DEA now or in the future, this will continue to be a heavy advocacy effort at the state level,” echoed Larson. “With every small step forward, there will come a new target. The fight will be long and arduous, but legalization at this point is inevitable.”